26089111 Working Capital Management

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SUMMER TRAINING REPORT

ON

WORKING CAPITAL MANAGEMENTIN

VINAYAK TEXTILE MILLSLIMITED

Submitted To:Mr. M.S.Arora (D.G.M.)

In partial fulfillment of requirement for the award of degree in

MASTER OF BUSINESS ADMINISTRATION

Submitted By:-AMAN DEEP PASSI

AJAY JAIN

(2008-10)


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PREFACE

This report , prepared during the summer training, is lifes greatest treasure. The training

held was very gainful as it took me close to real life.

The study aims to analyze the extent to which volume of working capital has been

effectively and efficiently utilized in this unit. The report is divided into various parts for

the close analyses of different components of working capital. The last part deals with the

conclusion and suggestions to improve the working capital management and to make it

more effective.


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ACKNOWLEDGEMENT

Accomplishment of a task with desired success calls for dedication towards work and

prompting guidance, co-operation and deliberation from seniors.

This report is the outcome of six weeks training that I received at VINAYAK

TEXTILE MILLS LTD.

First of all, I wish to express my profound gratitude and sincere thanks to MR.M.S. ARORA(D.G.M, ACCOUNTS DEPARTMENT),Incharge of the project for his

constant and tireless guidance and encouragement given during the study and who allowed

me to join summer training at VTM.

It gives me immense pleasure to acknowledge my deep sense of gratitude and

sincere thanks to Mr. GURNAM SINGH, ACCOUNTS OFFICER for extending the

courtesy and for guidance, support and affection throughout the course of this work.

I am extremely grateful to MISS. KAWALPREET KAUR and other faculty

members for their valuable guidance and glorious teaching.

In last, I express my profound gratefulness and indebtedness to the esteemed

organization for granting me the grand privilege of working on a project under team of

experts and professionals in the field of finance.


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CONTENTS

CHAPTER 1

THEORETICAL BACKGROUND OF WORKING CAPITAL

MANAGEMENT

CHAPTER 2

HISTORY OF INDIAN TEXTILE INDUSTRY

CHAPTER 3

PROFILE OF THE GROUP AND UNIT

CHAPTER 4

OUTLINE OF THE STUDY

CHAPTER 5

WORKING CAPITAL ANALYSIS

OPERATING CYCLE ANALYSIS

ANALYSIS ON THE BASIS OF HISTORICAL DATA

1. RATIO ANALYSIS

2. COMMON SIZE STATEMENT ANALYSIS

3. ANALYSIS ON THE BASIS OF SCHEDULE

OF CHANGES IN WORKING CAPITAL


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CHAPTER 6

CASH MANAGEMENT

CHAPTER 7

RECEIVABLES MANAGEMENT

CHAPTER 8

MANAGEMENT OF INVENTORY

CHAPTER 9

FINDINGS, SUGGESTIONS, CONCLUSION, BIBLIOGRAPHY

APPENDIX

REFERENCES AND BIBLIOGRAPHY


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EXECUTIVE SUMMARY

STUDY TOPIC:

WORKING CAPITAL MANAGEMENT OF VINAYAK TEXTILE MILLS LTD.

( A UNIT OF VARDHMAN POLYTEX LTD.)

OBJECTIVES OF THE STUDY:

To analyze the working capital management of the company.

To determine the operating cycle of the unit.

To know the future need of working capital in the running organization.

To render recommendations for effective management of working capital.

TIME SPAN:

A period of five year i.e. 2004-2008 has been taken for the study.

STUDY INSTRUMENT:

Annual Reports and other official documents of the selected unitsof the company.

METHODOLOGY:

To recognize the various type of information which are necessary for the study

of working capital management.

Collection of data from various department of VTM to analyze the working

capital management of VTM.


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For understanding the various reports, personal interviews are conducted.

With the help of various techniques like:

- Operating Cycle analysis

- Ratio Analysis

- Common size statement- Schedule of changes in working capital

The overall position of VTM is studied and analyzed

Suggestions are given on the basis of findings for better understanding of

working capital management.

SCHEME OF PRESENTATION:

The project report is prepared in three parts.

First part of the report gives an overview and theoretical background to the subject

i.e working capital management.

Second part of the report presents a general profile of VINAYAK TEXTILE MILLS

LTD. where the summer training has been undertaken.

Third part of the report deals with the project under study which includes:


- Ratio Analysis

- Common size statement

- Schedule of changes in working capital


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Chapter- 1

THEORETICAL BACKGROUND

OF WORKING CAPITAL MANAGEMENT


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M EANING OF WORKING CAPITAL:-

In simple words working capital means that which is issued to carry out the day to day

operations of a business. Capital required for a business can be classified under two main

categories

Fixed capital

Working capital

Every business needs funds for two purposes, for its establishment and to carry on its day

to day operations. Long term funds are required to create production facilities through

purchase of fixed assets such as plant and machinery, land, building, furniture etc.

Investment in these assets represents that part of firm capital, which is blocked on a

permanent or fixed basis called fixed capital. Funds are also needed for short term purposes

i.e. for the purchase of raw material, payment of wages and other day to day operations of

business. These funds are known as working capital. In other words, working capital refers

to that firms Capital, which is required for short term assets or current assets. Funds thus

invested in current assets keep revolving last and being constantly converted into cash and

this cash flow is again converted into other current assts. Hence it is known as circulating

or short term capital.

CONCEPT OF WORKING CAPITAL:

1. Gross Working Capital

It is simply called working capital refers to the firms investment in current assets so

the total current assets of the firm are known as gross working capital.

2. Net Working Capital

It represents the difference between current assets and current liabilities. Net working

capital may be positive or negative. Positive net working capital is that when current

assets are more than current liabilities. But when current liabilities become more than

current assets than it is negative working capital.


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In brief we can say that working capital is too much necessary for the smooth functioning

and proper utilization of fixed assets.

TYPES OF WORKING CAPITAL:

1. Permanent Working Capital:

As the operating cycle is a continuous process so the need for working capital also

arises continuously. But the magnitude of current assets needed is not always same;

it increases and decreases over time. However there is always a minimum level of

current assets. This level is known as permanent or fixed working capital.

2. Temporary Working Capital:

The extra working capital needed to support the changing production and sales

activities, is called variable or functioning or temporary working capital. This can

be shown in the following diagram:-

Amount of Working

Capital Temporary capital

Permanent Capital

Time


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NEED FOR WORKING CAPITAL :

The need for working capital cannot be overemphasized. The need of working capital

arises due to the time gap between production and realization of cash from sales. So the

working capital or investment in current assets becomes necessary need for working

capital. It arises due to following reasons:-

A. OPERATING CYCLE

Operating cycle is the time duration requires for converting sales into cash after the

conversion of resources into inventories.

First of all a firm purchase Raw Material, then after some processing it is converted

into workinprogress and after this further processing is done to convert workin

progress in finished goods. After the raw material is converted into finished goods, sales

are made. Sales are no always full cash sales; there are credit sales also. These credit sales

after some period are converted into cash. So the whole process takes the time. This time

taken is known as the length of operating cycle. So operating cycles includes:-

1. Raw Material conversion period (RMCP)

2. Workin progress conversion period (WIPCP)

3. Finished goods conversion period (FCP)

4. Debtors Conversion period (DCP)

So operating cycle can be known as following:-

Sales

Raw Material

Work in

Cash Collection fromDebtors

Finished Goods

Credit Cash Sales


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If the length of the operating cycle has short length period then less working capital is

required. So working capital requirement is directly related with operating cycle.

Operating cycle may be of two types

1. Gross Operating cycle

2. Net operating cycle

1. Gross Operating cycle

Gross Operating cycle is the total time period from the conversion of Raw Material

into finished goods and finished goods into sales and then sales into cash.

GOC =RMCP + WIPCP + FCP + DCP

2. Net Operating Cycle

As we provide period to debtors for the payments, our creditors also provide period to

us for payment to them. So this reduces our requirement of working capital. This also

affects the operating cycle. Operating cycles length reduces with so many days as

provided by the creditors to us. The difference between gross operating cycle and period

allowed by the creditors for payment is known as net operating cycle.

NOC = GOC CPP

B. WORKING CAPITAL REQUIREMENT FOR THE ANTICIPATED

NEEDS FOR FUTURE:-

These needs may be of Raw Material or Finished Goods. Sometimes because of non-

availability of Raw Material or due to seasonal availability of Raw Material some advances

stock of Raw Material becomes necessary for company. In the similar way due to sudden

arise of demand of finished goods in future more finished goods are kept in stock. For both

reasons more working capital is required because funds will be involve in these safeties

stocks.

DETERMINENTS OF WORKING CAPITAL:


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Followings are the main determinants of working capital.

1. Nature and Size of Business :

The working capital of a firm basically depends upon nature of its business for e.g.

Public utility undertakings like electricity; water supply needs very less working capital

because offer only cash sales whereas trading & financial firms have a very less

investment in fixed assets but require a large sum of money invested in working capital.

The size of business also determines working capital requirement and it may be

measured in terms of scale of operations. Greater the size of operation, larger will be

requirement of working capital.

2. Manufacturing Cycle:

The manufacturing cycle also creates the need of working capital. Manufacturing

cycle starts with the purchase and use of Raw Material and completes with the production

of finished goods. If the manufacturing cycle will be longer more working capital will be

required or vice versa.

3. Seasonal variation:

In certain industries like VTM raw material is not available throughout the year. They

have to buy raw material in bulk during the season to ensure an uninterrupted flow andprocess them during the year. Generally, during the busy season, a firm requires large

working capital than in the slack season.

.

4. Production Policy:

Production policy also determines the working capital level of a firm. If the firm has

steady production policy, it may require need of continuous working capital. But if the

firms adopt a fluctuating production policy means to produce more during the lead

demand season then the more working capital may require at that time but not in other

period during a financial year. So the different productions policy arises different type

of need of working capital.

5. Firms Credit Policy:


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The firms credit policy directly affects the working capital requirement. If the firm has

liberal credit policy, hence the more credit period will be provided to the debtors so this

will lead to more working capital requirement. With the liberal credit policy operating

cycle length increases and vice versa.

6. Sales Growth:

Working capital requirement is directly related with sales growth. If the sales are

growing, more working capital will be needed due to arises need of more Raw Material,

finished goods and credit sales.

7. Business Cycle:

Business cycle refers to alternate expansion and contraction in general business. In a

period of boom, larger amount of working capital is required where as in a period of

depression lesser amount of working capital is required.

8. Earning Capacity & Dividend Policy:

If the firm has enough earnings and it is not paying dividend then it will not be in need

of external borrowings. If firm wants to increase its earning power then more working

capital will be required also to pay more dividend more profits are needed which give

rise to more working capital. Company is paying 42% dividend to its shareholder.

9. Price Level Changes:

Changes in the price level also effects the working capital requirements. Generally, the

rising prices will require the firm to maintain larger amount of working capital as more

funds will be required to maintain the same current assets.

10. Condition of Supply:

The inventory of raw material, spares and stores depends on the condition of supply. If

the supply is prompt the firm can manage with small inventory. However if the supply

is unpredictable then the firm to ensure continuity of production, should acquire stocks

as and when they are available and have to carry larger inventory on an average.


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11. Other Factors:

Certain other factors such as operating efficiency, management ability, irregularities of

supply, import policy, asset structure, importance of labour, banking facilities, time lag.

etc. also influence the requirement of working capital.

So these are the main determinants of working capital. The importance of influence of

these determinants on working capital may differ from firm to firm.

MEANING AND NATURE OF WORKING CAPITAL

MANAGEMENT

The management of working capital is concerned with two problems that arise in

attempting to manage the current assets, current liabilities and the inter relationship that

asserts between them.

The basic goal is working capital management is to manage current assets and current

liabilities of a firm in such a way that a satisfactory of optimum level of working capital is

maintained i.e. it is neither inadequate nor excessive. This is so because both inadequate as

well as excessive working capital position is bad for business.

MAJOR DECISIONS IN WORKING CAPITAL MANAGEMENT

There are two major decisions management relating to working capital management:-

1. What should be ratio of current assets to sales?

2. What should be the appropriate mix of short term financing and long term

financing for financing these current assets?

1. Current assets in relation to sales:-


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If the firm can forecast accurately the factors, which effect the working capital, the

investment in current assets, can be designed uniquely. When uncertainty characteristics

the above factors, as it usually does the investment in current assets cannot be specified

uniquely. In case of uncertainty, the outlay on current assets should consist of base

component meant to meet normal requirement and a safety component meant to cope with

unusual requirement. The safety component depends upon low conservative or aggressive

in the current assets policy of a firm. If the firm purchases a very conservative current asset

policy it would carry a high level of current assets in relation to sales. If a firm adopts a

moderate current assets policy it would carry moderate level of current assets in relation to

sales, finally is a firm follows a highly aggressive current assets policy, it would carry a

low level of current assets in relation to sales.

VTM is following current assets policy showing moderate level of current assets in relation

to sales as is evident from ratio analysis.

2. Determining a Short Term and Long Term Financing Mix for

Financing of current assets:-

There are three approaches in this regard, which are discussed below:

HEDGING APPROACH

This approach is also called matching approach. In this approach there is a proper matching

of expected life of asset with the duration of fund. Usually, according to this approach

long-term sources are used for financing permanent current assets and fixed

assets & short-term sources are used for financing temporary current assets:

Temporary current assetsShort term financing


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term financing

Fixed Assets

Time

CONSERVATIVE APPROACH

In this approach there is more reliance on long-term financing in comparison to short-term

financing. Even some part of the temporary current comparison to finance from long-term

sources because long-term sources are less risky in comparison to short-term

sources.

Temporary Current Assets

Short-term financing

Permanent Current Assets Long-term financing

Fixed Assets

Time

AGGRESSIVE APPROACH

Permanent current assetsLong term financing

A

S

SE

T

S

A

S

SE

T

S


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In this approach there is more reliance on short term financing and even a part of

permanent current assets is financed from short-term finance.

Temporary current assets Short term financing

Permanent current assets Long term financing

Fixed Assets

Time

In VTM, the current assets are financed from short term sources as well as long term

sources, so they follow conservative approach.

AS

S

ET

S


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Chapter- 2

HISTORY OF THE INDIAN TEXTILE

INDUSTRY


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HISTORY OF THE INDIAN TEXTILE INDUSTRY:

The human need is to eat well for to be alive and shelter to protect them from discomforts

of nature and a place to live in. Human beings also need something to cover their body to

protect from diverse climates and to add the appearance. Earlier there was a time when the

human being known nothing about the cloth to wear. The human beings first use plant

barks, leaves and animal skin to wrap around them. Then as the development of brain took

place, they started to explore other possibilities and invent more in this area. There is

constant search for clothing and it led to the knowledge of sources from vegetation i.e.

Cotton and from animals i.e. wool, which could be knitted and woven to manufacture

clothes to wear.

The commercial development of man-made fiber began late in the 19th Century,

experienced much growth during the 1940s, expanded rapidly after world War II and in

the 1970s was still the subject of extensive Research and Development.

The spinning and weaving both are very common and attached with each other in all parts

of the world. We talk of the ancient times, when maximum work like weaving of the

clothes was done manually, but all the things were being done for the right perspectives.

From time to time in this world development had taken place, which has been found to be a

continuous process. Similarly considering the developments in the Spinning and Weaving

lot of improvements has come-up. Because earlier too was the Cotton crop was grown by

the farmers, but its end use was not done in an effective way, which seems good. So much

thick fiber was produced and accordingly its impact for the fabric preparation.


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APPARATUS USED FOR SPINNING AND WEAVING DURING

PRE-INDEPENDENCE PERIOD

Before Independence we talk of the political leaders like Mahatma Gandhi, who had

always insisted to use Khadi Clothes and even self-spinning and weaving. It is also called

as self-dependence for all needs. Such a good initiatives had come-up at India level

amongst the followers of the Leader Mahatma Gandhi. On the other side too such

initiatives had been proved very good and had attracted many other western countries to

follow such practices and show their excitedness. Though in case we talk of the Englishrule before the Independence i.e. 1947, it was not appreciated by the English Rulers, but

after the freedom these leaders had got very good appreciation particularly for the self

spinning and weaving and in an overall manner this sector of Spinning and Weaving was

industrialized even after the independence too on the basis of Indian cotton growers.


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It is needless to mention here that through out India, cotton growers belts are available and

after independence even English people take their raw material from here and had

established themselves with the Spinning and Weaving industries. Overall In India no such

preferences for the Spinning and Weaving industries were made, however the Library

research reveals that the first Cotton mill had been established in India during 1854 named

as Bombay Spinning and Weaving company. Though the Cotton industry had progressed a

lot, but in case we say that India alone is heading this world, it is wrong. Though in India

Textile Machine manufacturers are there and one or two decades ago they were the market

leaders, but with the help of the other parts/people of world i.e. Germany, Switzerland etc.,

India had made a very good recognition in the yarn market.

Because Indian Industrial Organizations have also initiated towards the most modernized

machinery produced by Schlafhorsts Germany, Luwa Humidification systems,Switzerland. This is just the example of the development, that in India too the most

modern machinery is being installed. However, it is an evident that the Indian yarn is

always running on the development trend since its Inception of first unit in Bombay, but its

position in the international market has not appeared so good. Because many other

countries like China as Cotton Textiles has went ahead. Though till today India has

achieved a lot in the Textile Industry and almost 700 Textile units are working

successfully, because India is having at present more than 20 Million spindles and a

weaving capacity of more than 2.5 Lac looms and the total output value of the same is

around Rs.1500 Cores, employing more than 10 Lac of workers directly.

The invention and production of man made thirty three fibers that is synthetic fibers like

Nylon, Acrylic fibers, Polyester Fiber, Viscose, Filament yarns, Melange yarn, etc., which

ultimately had given a good blow to grow for the Cotton Textile Industry and know occupy

a major part of consumer acceptance. About 50 countries have been importing such

material from India and the description of the Spinning and weaving industry had remained

incomplete without referring to the woolen industry.


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Chapter- 3



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The industrial city- Ludhiana nestles the corporate Headquarters of the Oswal Group of

industries. The Oswal Empire comprises of Anshupati Textiles Limited situated in

Ludhiana, Vardhman Polytex Limited situated in Bathinda, Vinayak Textile Mills situated

in Ludhiana. Oswal group is earning laurels by exporting yarn of international quality to

several countries and VPL Bathinda is an ISO 9001-2000 certified company and VTM is

granting authorization to use the Trademark USTERIZED USTER think quality.

BACK DROP:

OSWAL GROUP is a premier of textile group of northern India having its corporate

office situated at Ludhiana, Punjab,(India). The organization has existence for last 40 year

in core competency of spinning. We were earlier part of the Vardhman Group.but after

settlement between two brother in 2003, we have named ourselves as Oswal Group has

mainly into Spinning and Dyeing of all type of Yarn in different manufacturing of

Garments. The group has ambitious plan to diversify in future but in textiles related

activities

Oswal Group will achieve a turnover of Rs.500 crores by strengthening its core

competencies and capacities in Textile and diversified business to create value for its

stakeholders.(USD 110 millions).

The group has very good potential and high presence in the textiles industry with well set

manufacturing set up for 100% cotton, Polyester cotton, Worsted Spun Yarn ,Dyed Yarn,

and other blended yarns. All the group units have state of the art technology imported from

machinery giant in Europe, Japan, China and many other countries. To ensure quality

commitment to its valuable customers, the R&D department is well equipped with latest

R&D equipments. Continuous efforts are always being made to further improve the quality

and match the industry standard to meet the actual requirements of its quality conscious

customers.


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COMPANY STRUCTURE

OSWALGROUP

VPL

BATHIND

A

VTM

LUDHIAN

A

ANSHUPA

TI

LUDHIANA


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Anshupati Textiles Limited, based at Ludhiana in Punjab, the worsted spinning units in

the Indian subcontinent with 8000 worsted spindles installed, manufactures the Machine

Knitting Yarn, Mink Yarn and Fancy yarn, with vast product range, to meet every sort of

count combination demand of its prospective customers. The quality yarn in this unit is

manufactured using state of art technology imported from Europe, which is fully backed

with ultra modern R&D equipment for consistent quality. The yarn manufactured from this

unit holds a very strong reputation and demand both in domestic and international market.

The present capacity in terms of production is approximately 6.5 ton/Day

Vardhman Polytex Limited, a unit based at Bathinda in Punjab with 105000 cotton

spindles installed, is manufacturing 100% cotton yarn, Polyster cotton yarn and Tyre cord

yarn with vast range of count selection varies from NE 10 to 40 both in carded and combed

varieties. To ensure quality to its customers the group has received the ISO-9001-2000certification. This unit is exporting its product to Mauritius, Hong Kong, Singapore, Egypt,

Turkey, Bangladesh, China, Taiwan etc. The company keeps on receiving repeat orders,

which shows the level of confidence, bestowed by its customers into it. The company had

been awarded the Export House status by the Government of India. The present capacity in

term of production is around 65 Tons /day. They are also thinking of producing Value

added that is (i) Slub yarn (ii) Lyera yarn.

Vinayak Textile Mills, a unit at Ludhiana in Punjab with 50000 cotton spindles installed,

is manufacturing 100% cotton yarn and Polyster yarn with vast range of count selection

varies from NE 10s to 40s both in carded and combed varieties. The present capacity in

term of production is around 29Tons /Day and 14 -mt dyeing /day.

CURRENT SET UP:

Presently the Company has its corporate office situated at Chandigarh Road, village

Mundian, Ludhiana and works at Bathinda &Ludhiana. The day to day operations are

looked after by qualified technocrats/professional at plant/work as well as at corporate

office having rich experience in their respective fields of management.


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Ashok Oswal himself a Law Graduate has been looking after the textile business in this

company since 1987. Uptill family settlement, he was actively associated with the business

management of Vardhman group.

PRESENT CAPACITIESPresently the group has following production capacity and product range at its different

manufacturing facilities.

Location Installed

Capacity

(spindles)

Production

Capacity

Product Range

Bathinda (existing )

(VPL)

105000 65Tons / Day Cotton, synthetic,

blended yarnLudhiana

(Anshupati Textile)

8000 6.5 Tons/Day Acrylic Yarn

Ludhiana (VTM) 50000 29 Tons/Day

14-MT

dyeing/Day

100%cotton

yarn,Polyester/

Cottonblended

COMPUTERISATION

Presently the unit is operating under SAP system. This system is well structured keeping

in view the present tax regime like VAT, SERVICE TAX, and TDS etc. The system is

functioning to online to finance, raw material, stores and commercial. All the stauratory

returns are generated online from the system.

Personal computers have also been provided separately for each department like

administration, costing, R&D, Maintenance as well as the production areas.

USTERIZED CERTIFICATION

The unit had been awarded USTER certificate by Uster technologies AG CH-8610 Uster/

Switzerland on April 10, 2007. M/S Vinayak Textile mills, Ludhiana / India fulfil all

conditions for using the brand USTERIZED and will be checked regularly at once per year

basis.


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PRODUCTION

The unit is producing different types of yarn both for Domestic consumption and Export

purpose. The production department is headed by General Manager (G.M.). The VTM has

two units. The unit I is concerned with the production of 100% cotton yarn NE 10s-40s,Carded & Combed, Single & Multifold, Dyed , Processed & Polyester yarn NE 10s-40s,

Carded & Combed with a capability to offer any blend. The unit-II expansion is concerned

with production of Worsted Spun yarn 100% Cotton. .Production capacity of unit I is 15

ton per day and unit-II is 13 tons per day.

MARKETING

For Marketing of different product, the unit is having a modern marketing department

headed by experienced team which covers all the activities for conversion of finished goods

into cash. It keeps vigil on the market feed-back on the level competition, market, trend,

changing customer needs and modifications. The marketing department deals with

domestic sales, while export department of the group manages export sales. The VTM.

having the export and domestic ratio is 34:66. The unit is having different channels for

distribution of its products.

1. Selling agents at Ludhiana, Amritsar, Delhi, Mumbai and Tirupur.

2. Branches at Delhi and Ludhiana.

3. Direct Dispatches are also made by the units.

ORGNISATION STRUCTURE

A chart showing the organizational structure of VTM Ludhiana is given on the next page. It

shows the various hierarchical levels of the organization. It is a department line

organization which is divided into various department headed by their respective

department heads. All departments operate under the ultimate control of Chief Executive

Sh. Ashok Goyal. The orders flow directly from unit head to different departmental heads

down the line to respective department subordinates.


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Manufacturing Process Flow Chart of VPL100% COTTON CARDED/COMBED YARN

Issue of Cotton Bales

Laying Down

Blow Room

Card

Breaker Draw Frame

Finisher Draw Frame

Unilap

Comber

Speed Frame

Ring Frame

Winding

Cheese Winding

T.F.O

Conditioning

Packing for Double Yarn

Conditioning

Packing for Single Yarn

Storage & Dispatch


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MANUFACTURING PROCESS IN VINAYAK TEXTILE MILLS

LIMITED, LUDHIANA

Raw cotton is used as a basic raw material for producing 100% cotton yarn for ring spun.

1. MIXING

The different varieties of cotton are issued as per product mix from the raw material section

in bale from. The different varieties of cotton and different lots are mixed together as per

the requirement of end product and standard recommended mixings. The material is

conditioned in mixing for 24 hours.

2. BLOW ROOM

In this process, the cleaning and opening of fibers is done in a sequence of beaters. Main

purpose is to reduce tuft size, remove the trash particles and foreign matter etc, which often

comes in the bales.

3. CARDING

In this process, further cleaning of fibers is done and the fibers are opened into single fibers

extent i.e. the main purpose is further removal of trash in cotton and the industrialization

and parallelization of fibers. From the carding machine, the material is delivered in the

form of sliver.


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4. DRAW FRAME

The purpose of this process is to reduce the wt/yard in the card sliver 6 to 8 end of card

slivers are doubled together in this process to reduce variations and further drafting is done

to reduce the wt/yard of delivered sliver. Two passages are given at the draw frame stage.

In case of combed counts, the card sliver is fed to the precombing draw frame. The purpose

of combing draw frame is to reduce the wt/yard variations in the card sliver and to

parallelize the fibers. Singles passage is given at the precombing stage.

5. LAP FORMER

20-25 precombed draw slivers are fed together to produce a lap sheets of fibers, which is

wound on the spools.

6. COMBERS

The laps prepared on lap former are fed to combers. The main purpose of combing process

is to remove the short fibers from the material in the form of noil. The average noil

percentage caries from 15% to 18%. The material is delivered in the form of sliver.

7. SPEED FRAME

The finisher draw frame sliver is fed to the speed frames for conversion into the roving

form. In this process the wt/yard of the sliver is reduced, slight twist is given to the fleece

and the material delivered in the form of roving, wound on the plastic bobbins.

8. RING FRAME

The roving is fed to ring frame for conversion into yarn. In the process, the weight / yd ofroving is reduced as per requirement of ultimate user and the delivered yarn is wound on

the plastic bobbins.

9. WINDING

In this process, the yarn is wound on paper cones to produce bigger package, as per

requirement of the market. The weight / package varies from 1.2 kilogram to 2.1 kilogram.

During the process, in addition to the formation of bigger packages, the yarn faults are also

removed with help of electronic yarn cleaner.

10. DOUBLING

In the case of type cord the process is same upto cone winding. After cone winding the

yarn is fed into Cheese Winding. In the process 2 ply or 4 ply is to be done as per

requirement. After the yarn is fed into ring doubling and required T.P.I. is given in 2 ply or

4 ply yarn. In the next process in assembly cheese winding is get the package in the


32/101

package in the required from to be fed into T.F.O. in T.F.O. final yarn is prepared in the

form of cheese and required T.P.I. is given to the final yarn in process.

11. PACKING

In this process, the cones / cheese are packed in bags or cartoons as per the requirement of

the market. In addition to the packing the material is checked thoroughly to avoid mixing

of different materials


33/101

Chapter- 4



34/101


The management of working capital is very important. It involves the study of day to day

affairs of the company. The motive behind the study is to develop an understanding about

the working capital management in the running business organization and to help the

company in developing the efficient working capital management. So it helps in future

planning and control decisions.

OBJECTIVES OF THE STUDY

The objectives of the study are as follows:

To analyze the working capital management of the company.

To determine the operating cycle of the unit.

To know the future need of working capital in the running organization.

To render recommendations for the effective management of working capital.

SCOPE OF THE STUDY

The study is conducted at VTM LUDHIANA for 6 weeks duration. The study of W.C.

management is purely based on secondary data and all the information is available within

the company itself in the form of records. To get proper understanding of this concept, I

have done the study of the balance sheets, profit and loss a/cs, cash accounts, trial balance,

cost sheets. I have also conducted the interviews with employees of accounts and finance

department and stores department. So, scope of the study is limited up to the availability of

official records and information provided by the employees. The study is supposed to be

related to the period of last four years.


35/101

RESEARCH METHODOLOGY

To recognize the various type of information which are necessary for the study of

working capital management.

Collection of data from various department of VTM to analyze the working

capital management of VTM.

For understanding the various reports, personal interviews are conducted.

With the help of various techniques like:



36/101

- Ratio Analysis

- Common size statement

- Schedule of changes in working capital

The overall position of VTM is studied and analyzed

Suggestions are given on the basis of findings for better understanding of working

capital management.

SOURCES OF INFORMATION

Primary Data The personal interview with senior officials and various members

of finance and accounts department and also with other departments and collected

the data.

Secondary Data All the details necessary for the study was available within the

company itself.

LIMITATIONS OF THE STUDY

As central purchase office purchase raw material and central marketing yarn make

sales. So more detailed information cannot be received about these.

Cash from debtors are collected by the corporate office through commission agents.

So efforts for collection of debtors cannot be clearly known from VTM Ludhiana.

Investment of funds are also made by corporate office, so it becomes difficult to

know that how much investment is made in different ways for continuous

availability of funds.


37/101

Chapter- 5



38/101


1.OPERATING CYCLE ANALYSIS

Operating cycle refers to the time period which starts from the raw material purchases and

ends with realization of receivable. So it is total time gap between raw material purchases

to total debtors collection. This is also known as working capital cycle. Operating cycle is

therefore expressed in terms of months or weeks or days. The higher the operating cycle

period, higher the working capital requirement. It comprises of raw material conversion

period, WIP conversion period, FG conversion period and debtors conversion period and

creditors period. The basic reason for calculating operating cycle is to find out the means

for reducing the duration of operating cycle because if duration of operating cycle will be

less than working capital requirement will be less.

OC = R + W + F + D C

Where,

R = raw material conversion period

W = work in process period

F = finished goods conversion period

D = debtor collection period

C = creditors payment period

(1) Raw Material Conversion Period (RMCP)

= Average Raw Material Stock

Raw Materials consumed during the year

X 360


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FOR SPINNING MILL:

PARTICULARS 2004-05 2005-06 2006-07 2007-08

Average raw

material stock 183071228.14 227150926.07 218046754.94 328005499.45

Raw material

consumed during

the year

385430133.40 309974487.22 410666073.76 495453061.76

RMCP 169.2 DAYS 263.8 DAYS 191.1 DAYS 238.3 DAYS

0

50

100

150

200

250

300

2004-05 2005-06 2006-07 2007-08

RMCP

FOR DYE HOUSE:

PARTICULARS 2004-05 2005-06 2006-07 2007-08

Average raw

material stock - 15012815.54 16023458.66 11108879.34

Raw material

consumed during

the year

- 122961363.25 263718304.68 338194022.33

RMCP - 43.9 DAYS 21.9 DAYS 11.8 DAYS


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0

5

10

15

20

25

30

35

40

45

2004-05 2005-06 2006-07 2007-08

RMCP

(2) Work in Progress Conversion Period (WIPCP)

= Average stock in progress

Cost of Production

FOR SPINNING MILL:

PARTICULARS 2004-05 2005-06 2006-07 2007-08

Average stock in

progress 4046698.00 3388006 6406842 8595640.40Cost of

production 500317045.88 426414576.75 608858271.37 751824244.94

WICP 2.91 DAYS 2.9 DAYS 3.8 DAYS 4.1 DAYS

X 360


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0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

2004-05 2005-06 2006-07 2007-08

WICP

FOR DYE HOUSE:

PARTICULARS 2004-05 2005-06 2006-07 2007-08Average stock in

progress 1021072 5791673 6692336 4917031.00

Cost of

production 25254802.19 219005634.76 404498734.7 524670967.58

WICP 14.6 DAYS 9.5 DAYS 5.9 DAYS 3.4 DAYS

0

2

4

6

8

10

12

14

16

2004-05 2005-06 2006-07 2007-08

WICP

(3) Finished Goods Conversion Period (FGCP)


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= Average Finished good inventory

Cost of goods sold

FOR SPINNING MILL:

PARTICULARS 2004-05 2005-06 2006-07 2007-08

Average finished

goods inventory 18939831.18 9473270 12545845 39817039.68

Cost of goods

sold 500317045.88 426414576.75

608858271.37

751824244.94

FGCP 13.6 DAYS 7.9 DAYS 7.4 DAYS 19.1 DAYS

0

5

10

15

20

2004-05 2005-06 2006-07 2007-08

FGCP

FOR DYE HOUSE:

PARTICULARS 2004-05 2005-06 2006-07 2007-08

Average

finished goods

inventory

- 5857416 6745966 10034498

Cost of goods

sold

- 219005634.76 404498734.7 524670967.58

FGCP - 9.6 DAYS 6 DAYS 6.9 DAYS

X 360X 360X 360


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0

2

4

6

8

10

2004-05 2005-06 2006-07 2007-08

FGCP

(4) Debtors Conversion Period (DCP)

= Average DebtorsCredit Sales

FOR SPINNING MILL :

PARTICULARS 2004-05 2005-06 2006-07 2007-08

Average debtors 37279070.84 37279070.84 92312638.13 29970369.49

Credit sales 596069587.62 543167006.35 588183650.23 730047747.60

DCP 22.4 DAYS 24.7 DAYS 56.5 DAYS 14.8 DAYS

0

10

20

30

40

50

60

2004-05 2005-06 2006-07 2007-08

DCP

X 360


44/101

FOR DYE HOUSE:

PARTICULARS 2004-05 2005-06 2006-07 2007-08

Average debtors 247769 28959455.84 48904270.97 99301521.09

Credit sales 212240 202379449.81 492529652.69 610863493.76

DCP 420.3 DAYS 51.5 DAYS 35.7 DAYS 58.5 DAYS

0

50

100

150

200

250

300

350

400

450

2004-05 2005-06 2006-07 2007-08

DCP

(5) Credit Conversion Period (CCP)

= Average Creditors

Credit Purchases

FOR SPINNING MILL:

PARTICULARS 2004-05 2005-06 2006-07 2007-08

Average creditors 4316518.31 5840979.88 5294945.83 23709393.26

Credit purchases 385430133.40 309974487.22 410666073.76 495453061.76

CCP 4.03 DAYS 6.8 DAYS 4.6 DAYS 1.7 DAYS

X 360


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0

1

2

3

4

5

6

7

2004-05 2005-06 2006-07 2007-08

CCP

FOR DYE HOUSE:

0

2

4

6

8

10

12

14

16

2004-05 2005-06 2006-07 2007-08

CCP

PARTICULARS 2004-05 2005-06 2006-07 2007-08

Average creditors - 5449322.89 1203818.69 1767614.89

Credit purchases - 122961363.25 263718304.68 338194022.33

CCP - 15.9 DAYS 1.6 DAYS 1.9 DAYS


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GROSS OPERATING CYCLE FOR SPINNING MILL:

YEAR RMCP WICP FGCP DCP GOC

2004-05 169.2 DAYS 2.91 DAYS 13.6 DAYS 22.4 DAYS 208.1 DAYS




0

50

100

150

200

250

300

2004-05 2005-06 2006-07 2007-08

GOC

NET OPERATING CYCLE FOR SPINNING MILL:

YEAR GOC CCP NOC

2004-05 208.11 DAYS 4.03 DAYS 204.08 DAYS

2005-06 299.3 DAYS 6.8 DAYS 292.5 DAYS

2006-07 258.8 DAYS 4.6 DAYS 254.2 DAYS

2007-08 276.3 DAYS 1.7 DAYS 274.6 DAYS


47/101

0

50

100

150

200

250

300

2004-05 2005-06 2006-07 2007-08

NOC

GROSS OPERATING CYCLE FOR DYE HOUSE:YEAR RMCP WICP FGCP DCP GOC

2004-05 - 14.6 DAYS - 420.3 DAYS 434.9 DAYS


2006-07 21.9 DAYS 5.9 DAYS 6 DAYS 35.7 DAYS 69.5 DAYS


0

50

100

150

200

250

300

350

400

450

2004-05 2005-06 2006-07 2007-08

GOC

NET OPERATING CYCLE FOR DYE HOUSE:

YEAR GOC CCP NOC

2004-05 434.9 DAYS - 434.9 DAYS

2005-06 114.5 DAYS 15.9 DAYS 98.6 DAYS

2006-07 69.5 DAYS 1.6 DAYS 67.9 DAYS

2007-08 80.6 DAYS 1.9 DAYS 78.7 DAYS


48/101

0

50

100

150

200

250

300

350

400

450

2004-05 2005-06 2006-07 2007-08

NOC

ANALYSIS

It is claimed that gross operating cycle of VTM for spinning mill is increasing in year

2004-05 and 2005-06 and it is decreasing for dye house in year 2004-05 and 2005-06. For

spinning mill in year 2004-05 it is 208.11 days then it increased to 299.3 days in year

2005-06. In 2006-07, it is decreased to 258.8 days. The main reason of increasing gross

operating cycle in 2004-05 and 2005-06 is due to more availability of raw material in the

stores but in year 2006-07 there is less GOC due to less availability of raw material in

stores. The GOC for dye house has shown a significant decreament from 434.9 days in

2004-05 to 69.5 days in year 2006-07. In year 2007-08, it came out to be 80.6 days. The

GOP for dye house is not satisfactory as it has decreased to a great extent.

2.ANALYSIS OF WORKING CAPITAL FROM DIFFERENT ASPECTS ON BASIS

OF THE HISTORICAL DATA

There are number of devices to analyze working capital like ratio analysis, common size

statement etc. We will discuss them one by one as follows:


49/101

1. RATIO ANALYSIS

Ratio analysis is a technique of analysis and interpretation of financial statements. It is the

process of establishing and interpreting various ratios for helping in making decisions. It

only means of better understanding of financial strengths and weaknesses of a firm. The

main emphasis has been on calculating the ratios related to a working capital management.

LIQUIDITY RATIOS

These are the ratios which measures the short term solvency or financial position of a firm.

In other words, it refers to the ability of a concern to meet its current obligations as and

when these become due. To measure the liquidity of a firm, the following ratios can be

calculated.

CURRENT RATIO It may be defined as the relationship between current assets and

current liabilities. This ratio is also known as working capital ratio and measures the ability

of the firm to meet current liabilities. High current ratio indicates firm is liquid and has the

ability to pay its current obligations in time as and when they become due.

A ratio equal or near to the rule of thumb of 2:1 i.e. current assets double the current

liabilities is considered to be satisfactory.

Current Ratio = Current Assets

Current LiabilitiesCurrent Ratio of VTM

FOR SPINNING MILL:

YEAR CURRENT

ASSETS

CURRENT

LIABILITIES

CURRENT RATIO

(CR)

2004-05 329780134.40 22952307.82 14.4

2005-06 337914119-55 25398799.03 13.3

2006-07 372031954.03 29553280.08 12.6

2007-08 462706185.06 47891481.92 9.7


50/101

0

2

4

6

8

10

12

14

16

2004-05 2005-06 2006-07 2007-08

CR

FOR DYE HOUSE:

YEAR CURRENT

ASSETS

CURRENT

LIABILITIES

CURRENT RATIO

(CR)

2004-05 9633007.63 10462522.55 0.9

2005-06 64846029.63 13090777.94 4.92006-07 92984361.6 8735151.3 10.6

2007-08 148537709.99 5975377.17 24.9


51/101

0

5

10

15

20

25

2004-05 2005-06 2006-07 2007-08

CR

ANALYSIS

The current ratio of the spinning mill is above the standard and it guarantees the paymentof dues in time. The current ratio of the company has been considerably high because they

had made over investment in inventories which is the main reason for the high ratio of

current assets. Inventories are high because of seasonal availability of raw material. The

overall position of current ratio for spinning mill is satisfactory.

The current ratio of dye house has shown a remarkable increament from 0.9 in 2004-05

to10.6 in 2006-07 and then to 24.9 in 2007-08. Initially in 2004-05, the ratio was not

satisfactory but it is quite satisfactory for the years after 2004-05 and especially for the year

2007-08.

LIQUID RATIO This ratio is also known as quick ratio or acid test ratio. It is a more

rigorous test of liquidity than the current ratio. It is based on those current assets which are

highly liquid. Inventory and prepaid expenses are excluded because they are deemed to be

least liquid component of current assets. A high quick ratio is the indication that the firm is

liquid and has the ability to meet its current liabilities in time and on the other hand low

ratio represents liquidity position is not good.

Quick Ratio = Quick or Liquid Assets

Current Liabilities


52/101

Quick Assets = Current Assets Inventory Prepaid Expenses

Quick Ratio of VTM

FOR SPINNING MILL:

YEAR LIQUID ASSETS CURRENT

LIABILITIES

LIQUID RATIO

(LR)

2004-05 120598521 22952307.82 5.3

2005-06 89811409.92 25398799.03 3.5

2006-07 127216004.91 29553280.08 4.3

2007-08 81358926 47891481.92 1.7

0

1

2

3

4

5

6

2004-05 2005-06 2006-07 2007-08

LR

FOR DYE HOUSE:

YEAR LIQUID ASSETS CURRENT

LIABILITIES

LIQUID RATIO

(LR)

2004-05 6123027.86 10462522.55 0.6

2005-06 33218697.57 13090777.94 2.5

2006-07 56812234.26 8735151.3 6.5

2007-08 115776657.53 5975377.17 19.4


53/101

0

5

10

15

20

2004-05 2005-06 2006-07 2007-08

LR

ANALYSIS

According to rule of thumb, it should be 1:1. For spinning mill, the liquid ratio has

decreased over the past four years. It was 5.3 in 2004-05 and decreased to 4.3 in 2006-07and then to 1.7 in 2007-08. The decreament in the ratio is not satisfactory, however the

ratio 1.7 in 2007-08 matches the rule of thumb but it should be quite more than the rule of

thumb.

For dye house,the liquid ratio has shown a significant increament over the past four years.

It increased from 0.6 in 2004-05 to 6.5 in 2006-07 and then to 19.4 in 2007-08. The

increament in the ratio is quite good for the dye house. This shows that the investment in

liquid assets has increased over the past years.

ABSOLUTE LIQUID RATIO Although receivables are generally more liquid than

inventories yet there may be doubt regarding their realization into cash in time. Absolute

liquid ratio shows the relationship between liquid assets which include cash, bank and

marketable securities.

Absolute Liquid Ratio = Absolute Liquid Assets

Current Liabilities

Absolute Liquid Ratio of VTM


54/101

FOR SPINNING MILL:

0

0.02

0.04

0.06

0.08

0.1

0.120.14

0.16

0.18

2004-05 2005-06 2006-07 2007-08

ALR

FOR DYE HOUSE:

YEAR ABSOLUTE

LIQUID ASSETS

CURRENT

LIABILITIES

ABSOLUTE

LIQUID RATIO

(ALR)

2004-05 - - -

2005-06 233902 13090777.94 0.01

2006-07 253609 8735151.3 0.022007-08 - - -

YEAR ABSOLUTE

LIQUID ASSETS

CURRENT

LIABILITIES

ABSOLUTE

LIQUID RATIO

(ALR)

2004-05 435629.36 22952307.82 0.012005-06 569656 25398799.03 0.02

2006-07 5210807.58 29553280.08 0.18

2007-08 395884.64 47891481.92 0.01


55/101

0

0.005

0.01

0.015

0.02

2004-05 2005-06 2006-07 2007-08

ALR

ANALYSIS

The acceptable standard for this ratio is 0.5:1. Thus spinning mill and dye house, we cansay that in all the years, it is below the standard due to very less cash and bank balance

maintained because major cash receipts and payments are handled by corporate office. It is

very less in 2005-06, 2006-07 due to increased cost of production both for spinning mill

and dye house.

WORKING CAPITAL TURNOVER RATIO Working capital turnover ratio indicates

the velocity of the utilization of net working capital. This ratio measures the efficiency with

which the working capital is being used by a firm.

Working Capital Turnover Ratio = Sales

Net Working Capital

Working Capital Ratio of VTM

FOR SPINNING MILL:

YEAR SALES NET WORKING

CAPITAL

WCTR

2004-05 596069587.62 306883587.58 1.9

2005-06 543167006.35 312620335.52 1.7

2006-07 588183650.23 342591885.95 1.7

2007-08 730047747.60 415076656.14 1.8


56/101

1.6

1.65

1.7

1.75

1.8

1.85

1.9

2004-05 2005-06 2006-07 2007-08

WCTR

FOR DYE HOUSE:

YEAR SALES NET WORKING

CAPITAL

WCTR

2004-05 - - -

2005-06 202379449.81 51755251.69 3.9

2006-07 492529652.69 84249210.4 5.8

2007-08 610863493.76 142581027.83 4.3

0

1

2

3

4

5

6

2004-05 2005-06 2006-07 2007-08

WCTR

ANALYSIS

This ratio indicates the number of times the working capital is turned over in the course of

a year. A high working capital ratio indicates the effective utilization of working capital


57/101

and less working capital ratio indicates less utilization. For spinning mill, the ratio is quite

same for the past four years. It is 1.9 in 2004-05, 1.7 in years 2005-06 and 2006-07 and 1.8

in 2007-08. For dye house, the ratio is more than that of spinning mill. It shows increament

from 3.9 in 2005-06 to 5.8 in 2006-07 and then decreased to 4.3 in 2007-08. The ratio is

satisfactory for dye house but it should not decrease further.

2. COMMON SIZE STATEMENT ANALYSIS

This analysis is mainly to see the composition of working capital. Its purpose is to see the

%age of each asset to the total asset and %age of each liability to total liability.

COMMON SIZE STATEMENT

FOR SPINNING MILL:

FOR YEAR 2004-05:

PARTICULARS AMOUNT ( IN RS.) %

FIXED ASSETS

Net block 570440434.93 62.18

Capital work-in-progress 17200494.12 1.87

Project & Pre-operative

expenses

- -


58/101

Total fixed assets 587640929.05 64.05

CURRENT ASSETS

Inventories 208195599.41 22.69

Sundry debtors 37039996.26 4.04

Cash & Bank Balances 435629.36 0.05

Loans & Advances 84108909.37 9.17

Total current assets 329780134.4 35.95Total assets 917421063.45 100

SHARE CAPITAL &RESERVES

Inter unit balances 567503938.84 61.94

Secured loans 336825183.77 36.76

Reserves & Surplus (9804605.98) (1.07)

Total Capital & Reserves 894524516.63 97.64

CURRENT LIABILITIES

Sundry creditors 3014518.31 0.33

Other liabilities 16627112.73 1.81

Interest accrued but not due668837 0.07

Security deposits &

Retention money

1339839.78 0.14

Total current liabilities 21650307.82 2.36

Total of liability side 916174824.45 100

FOR YEAR 2005-06:

PARTICULARS AMOUNT (IN RS.) %

FIXED ASSETS

Net block 565709880.59 49.8

Capital work-in-progress 227016140.46 20


expenses

4400478.52 0.39


CURRENT ASSETS

Inventories 246141889.88 21.69Sundry debtors 37279070.84 3.28

Cash & Bank Balances 569656 0.05

Loans & Advances 53923502.83 4.75

Total current assets 337914119.55 29.77

Total assets 1135040619.12 100

SHARE CAPITAL &

RESERVES


59/101


Secured loans 425924449.39 31.95

Reserves & Surplus 24531788.78 1.84


CURRENT LIABILITIES


Other liabilities 18036489.88 1.35Interest accrued but not due

- -

Security deposits &

Retention money

1521329.27 0.11



FOR YEAR 2006-07:


FIXED ASSETS

Net block 873085829.95 67.94



expenses

-

-


CURRENT ASSETS

Inventories 240453655.62 18.71


Cash & Bank Balances 5210807.58 0.41Loans & Advances 34054852.70 2.65


Total assets 1285106467.6 100

SHARE CAPITAL &

RESERVES


Secured loans 532957606.95 41.47



CURRENT LIABILITIES



Interest accrued but not due

- -

Security deposits &

Retention money

2938714.93 0.22



60/101


FOR YEAR 2007-08:


FIXED ASSETS

Net block 822992994.43 62.69



expenses

- -


CURRENT ASSETS

Inventories 379510100.55 28.91


Cash & Bank Balances 395884.64 0.03Loans & Advances 52829830.38 4.02


Total assets 1312865150.41 100

SHARE CAPITAL &

RESERVES


Secured loans 431510188.42 31.06



CURRENT LIABILITIES



Interest accrued but not due- -

Security deposits &Retention money

- -



FOR DYE HOUSE:

FOR YEAR 2004-05:



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FIXED ASSETS

Net block 186017879.85 93.34



expenses

- -


CURRENT ASSETSInventories 3247313.77 1.63

Sundry debtors 247769 0.12

Cash & Bank Balances - -

Loans & Advances 6137924.86 3.08


Total assets 199292469.25 100

SHARE CAPITAL &

RESERVES


Secured loans 59872920 (6.02)

Reserves & Surplus (11994678.41) 30.04Total Capital & Reserves 188829946.7 94.75

CURRENT LIABILITIES




- -

Security deposits &

Retention money

672844.48 0.34



FOR YEAR 2005-06:


FIXED ASSETS

Net block 184248879.27 73.72

Capital work-in-progress 849096.46 0.34Project & Pre-operativeexpenses

- -


CURRENT ASSETS

Inventories 31300541.06 12.52




62/101



Total assets 249944005.36 100



Secured loans 59872920 5.22Reserves & Surplus (14177921.30) 22.06


CURRENT LIABILITIES




- -

Security deposits &

Retention money

819607.13 0.30



FOR YEAR 2006-07:


FIXED ASSETS

Net block 220213154.5 70.24

Capital work-in-progress 300237 0.096


expenses

- -


CURRENT ASSETS

Inventories 35816899.3 11.42





Total assets 313497752.6 100



63/101


Secured loans 59872920 92.6



CURRENT LIABILITIES


Other liabilities 7335764.53 2.34Interest accrued but not due

- -

Security deposits &

Retention money

195567.89 0.062



FOR YEAR 2007-08:


FIXED ASSETS

Net block 209812946.08 58.39



expenses

- -


CURRENT ASSETS

Inventories 32341614.46 9


Cash & Bank Balances - -

Loans & Advances 16894574.44 4.70


Total assets 359334193.13 100

SHARE CAPITAL &

RESERVES


Secured loans 131435332.52 12.56



CURRENT LIABILITIESSundry creditors 1767614.89 0.41



- -

Trade deposits and other

Advances

131757.07 0.03



64/101


ANALYSIS

For spinning mill, the major part of current assets involves inventories. It covers more than

50% of total current assets. The debtors also have significant part of current assets. It

contributes approximate 11% to 30% part of current assets for all the years from 2004-05 to

2007-08. The least contribution is thus of cash and bank balance. On the other hand,

current liabilities consist of mainly creditors and other liabilities. In 2007-08, current assets

have increased due to increase in inventories and loans & advances, and current liabilities

have also shown increament. So the working capital is more for year 2007-08 as

compared to last years working capital.

For dye house, the inventories form a good portion of current assets and contribute 30% to

50% of the total current assets over the past years. The sundry debtors also show

fluctuating proportions in the total current assets over the years. The proportion is quite less

for year 2004-05 but it increased significantly for the next years and contributed about 66%

to the total current assets in year 2007-08. The current liabilities mainly consist of sundry

creditors and other liabilities. The sundry creditors have decreased over the past years.

The other liabilities have shown increament from year 2004-05 to year 2006-07 but it has

decreased in year 2007-08.

3. ANALYSIS ON THE BASIS OF SCHEDULE OF CHANGES IN WORKING

CAPITAL

SCHEDULE OF CHANGES IN WORKING CAPITAL:

FOR SPINNING MILL:


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ANALYSIS:

PARTICULARS 2004-05 2005-06 INCREASE DECREASE

CURRENT

ASSETS:

Inventories 208195599.41 246141889.88 37946290.47

S. debtors 37039996.26 37279070.84 239074.58

Cash & Bank

Balances

435629.36 569656 134026.64

Loans &

Advances

84108909.37 53923502.83 30185406.54

Total current

assets (A)

329780134.4 337914119.55

CURRENT

LIABILITIES:

S. creditors 4316518.31 5840979.88 1524461.57Other liabilities 16627112.73 18036489.88 1409377.15

Int. accrued but

not due

668837 - 668837

Security deposits

& Retention

money

1339839.78 1521329.27 181489.49

Total current

liabilities (B)

22952307.82 312515320.52

Working capital

(A-B)

306827826.58 312515320.52

Net increase inworking capital 5687493.94 5687493.94

312515320.52 312515320.52 38988228.69 38988228.69


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FOR YEARS 2004-05 AND 2005-06:

As we have a look on the schedule of changes in working capital for the spinning mill over

the years 2004-05 and 2005-06, we find that, among current assets,inventories, sundry

debtors and cash & bank balances have shown increament from year 2004-05 to year 2006-

07. The Loans & advances have got decreased in the same years. Among the current

liabilities, the sundry creditors and other liabilities have increased. So the overall net

working capital has increased.

FOR YEARS 2006-07 AND 2007-08:

Among the current assets,inventories and loans & advances have increased and sundry

debtors and cash & bank balances have shown decreament. The total current assets have


CURRENT

ASSETS:

Inventories 240453655.62 379510100.55 139056444.93

S. debtors 92312638.13 29970369.49 62342268.64Cash & BankBalances

5210807.58 395884.64 4814922.94

Loans &

Advances

34054852.70 52829830.38 18774977.68

Total current

assets (A)

372031954.03 462706185.06

CURRENT

LIABILITIES:

S. creditors 5294945.83 23709393.26 18414447.43

Other liabilities 21319619.32 23475855.20 2156235.88

Trade deposits - 706233.46 706233.46Security deposits

& Retention

money

2938714.93 - 2938714.93

Total current

liabilities (B)

29553280.08 47891481.92

Working capital

(A-B)

342478673.95 414814703.14

Net increase in

working capital

72336029.19 72336029.19

414814703.14 414814703.14 160770137.54 160770137.54


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increased. Among the current liabilities,sundry crditors and other liabilities have increased.

So the net working capital has also increased.

FOR DYE HOUSE:


CURRENT

ASSETS:

Inventories 3247313.77 31300541.06 28053227.29

S. debtors 247769 28959170.26 28711401.26

Cash & Bank

Balances

- 233902 233902

Loans &

Advances

6137924.86 4352416.31 1785508.55

Total current

assets (A)

9633007.63 64846029.63

CURRENT

LIABILITIES:

S. creditors 8359951.15 5449322.89 2910628.26

Other liabilities 1429726.92 6821847.92 5392121

Security deposits& Retention

money

672844.48 819607.13 146762.65

Total current

liabilities (B)

10462522.55 13090777.94

Working capital

(A-B)

(829514.92) 51755251.69

Net increase in

working capital

52584766.61 52584766.61

51755251.69 51755251.69 59909158.81 59909158.81


CURRENT

ASSETS:

Inventories 35816899.34 32341614.46 3475284.88

S. debtors 48904270.97 99301521.09 50397250.12Cash & Bank

Balances

253609 - 253609

Loans &

Advances

8009581.93 16894574.44 8884992.51

Total current

assets (A)

92984361.24 148537709.99

CURRENT

LIABILITIES:

S. creditors 1203818.69 1767614.89 563796.2

Other liabilities 7335764.53 4076005.21 3259759.32

Trade deposits - 131757.07 131757.07

Security deposits

& Retention

money

195567.89 - 195567.89

Total current

liabilities (B)

8735151.11 5975377.17

Working capital

(A-B)

84249210.13 142562332.82

Net increase in

working capital

58313122.69 58313122.69

142562332.82 14256332.82 62737569.84 62737569.84


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ANALYSIS

FOR YEARS 2004-05 AND 2005-06:

Among the current assets, inventories, sundry debtors and cash & bank balance have

increased but the loans & advances have decreased. The total current assets have increased.

Among the current liabilities, sundry creditors have decreased and other liabilities have

increased. The total current liabilities have increased. So, the net working capital has

increased.

FOR YEARS 2006-07 AND 2007-08:

Among the current assets, inventories and cash & bank balances have decreased. On the

other hand, sundry debtors and loans & advances have increased. The total current assets

have increased. Among the current liabilities, sundry creditors have increased but other

liabilities have decreased. So, the net working capital has increased.


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Chapter- 6

CASH MANAGEMENT


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CASH MANAGEMENT

Cash management refers to management of cash balance and the bank balance and also

includes the short term deposits. The cash is important current asset for the operation of the

business. Cash is the most liquid and can be used to make immediate payments.

Insufficiency of cash at any stage may prevent a firm from discharging its liabilities or

force it to sell its other assets immediately. On the other hand extreme liquidity may take

uneconomic investments. This underlines the significance of cash management.

The term cash includes coins, currency and cheques held by the firm ad balances in its bank

accounts. Sometimes near- cash items such as marketable securities of bank item deposits

are included in cash.

A financial manager is required to manage the cash flows (both inflows and outflows)

arising out of the operations of the firm. For this he will have to forecast the cash inflows

from sales and outflows for costs etc. This will enable the financial manager to identify the

timings as well as amount of future cash flows. Cash management does not end here and

the financial manager may also be required to identify the sources from where cash may be

produced on a short term basis or the outlets where excess cash may be invested for a short

term.

Cash is the basic input needed to keep the business running on continuous basis. It is also

the ultimate output expected to realize by selling the product manufactured by the firm.

Cash shortages will simply disturb the firms manufacturing operations where excessive


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cash will simply remain idle. Thus, firm should keep sufficient cash neither more nor less.

Hence, a major function of the financial manager is to maintain a sound cash position. Cash

management is one of the key areas of working capital management. A part from the fact

that it is the most liquid current asset

, cash is the common denominator to which all the current assets can be reduced because

the major liquid asset i.e. receivables and inventory get eventually converted into cash.

Cash management is concerned with the managing of:

Cash inflows and outflows of the unit

Cash flows within the unit

Cash balance held by the unit at a point of time by financing deficit or investing

surplus cash

MOTIVES FOR HOLDING CASH

Transaction Motive

It means a firm holds cash for conduct of business. The daily requirements of cash come

under this motive. So enough cash for smooth business is required for transaction motive.

Precautionary Motive

Under this motive cash is held for most contingencies in future. There may be so many

reasons due to which the emergency of cash arises. These reasons can be:

(i) Sudden rise in the demand which leads to more production

(ii) Due to inflation

(iii) Due to any miss-happening in future like loss by fire theft etc. the cash is held

for precautionary motive in advance. This cash may be held as marketable

securities which are highly liquid and low risky.

Speculative Motive

The speculative motive relates to holding of cash for investing in profit making opportunity

as and when arises. The opportunity may arise in securities, in material purchasing or in

any other type. By holding cash for speculative motive, the firm can choose most profitable

opportunity, yet by enlarge, business firm do not engage in speculations because the

primary motive to hold cash are transaction and precautionary motive.


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In VTM, it holds cash only for transaction motive. Speculation and precautionary motives

cash is held by corporate office. If the VTM requires some more cash to meet any future

contingency then it informs about it to corporate office and corporate office sends cash to

VTM as per requirement. But the VTM has to give the reasons for extra cash to corporate

office.

The firm should evolve strategies regarding the following four facts of cash management:

(1) Cash Planning

(2) Managing the cash flow

(3) Optimum cash level

(4) Investing surplus cash

1. CASH PLANNING

Cash planning is a technique to plan to control the use of cash. Cash planning can help to

anticipate future cash flows and the need of the form and reduces the possibility of idle

cash. Cash planning may redone on daily, weekly and monthly basis. Cash budget is the

most significant device to plan for and control cash receipt and payments.

The unit under the study makes cash planning through following tools: Cash Budget

Rolling cash flow statement

Daily cash flow statement

The cash budgets are prepared by the firm on monthly and yearly basis. Through cash

budget the unit can make estimates of cash receipts and disbursement during a future

period of time. There estimates show the requirement of cash in the unit.

Another device used for cash planning is six monthly rolling cash flow statement prepared

on monthly basis. This statement shows the projections of inflows and outflows of cash

during the next six months.


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This statement can help in taking various decisions, if the unit wants to make any capital

payment, these statements can tall when there is surplus of cash and payments can be made

during the month.

Daily cash flow statement is prepared to see the daily cash position. There estimations are

sent to corporation office at Ludhiana so that needed cash is obtained at night time.

2. MANAGING CASH FLOWS

Significant part of cash management is the management of cash flow both inflows and

outflows without any loss to the unit and without impairing its goodwill in the market.

These are made at head office Ludhiana so the main source of cash inflows to VTM is the

cash credit limit, which is as follows:

Banks Main Limit

(in crores)

Sub-limit transfer to

LDH Unit (in crores)

Peak Normal

Punjab National Bank. 2 crores 2 crores 5 crore in month.

The main limits are controlled by H.O. The sub-limits have been allocated to the unit for

fulfilling day-to-day requirements of working capital. The daily bank-position of sub-limits

is fixed to H.O. for monitoring daily bank position. In case of drawn in sub-limits the funds

get transferred from main limits. The interest rate paid for this is near about 11.25%. The

cash credit limits are sanctioned by the bank against the hypothecation stocks and

fluctuating assets as security.

The unit can withdraw from these limits as and when needed. The amount received from

the sale of yarn is debited at head office in main limit. To exchange the efficiency of cash

management the surplus funds are transferred to other units if those units need cash thus

increasing the overall profitability.

Main outflow of the unit is on raw material cost. Different types of raw material are

purchased from different states. Normally cotton is purchased during peak season when

good quality cotton is available, generally payment for cotton is made when cotton is

received in the mill, and credit period depends upon the states from which cotton is

purchased.


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Cash outflows also arise on account of purchase of stores, spares and all other material

normal credit for these products is mainly 30 to 60 days and full credit period is used.

3. DETERMINING OPTIMUM BALANCE

An efficient finance manager always aims at preparing the cash and bank balance at the

optimum level i.e. neither it is too high that it remains idle and the firm losses interest on it,

nor it is too low that the firm is always in cash tight position. The unit always keep 1.5 lacs

for the routine expenses, around the days of wages the amount is approx. 4 lacs per day is

kept in hand, thus the unit maintains the appropriate amount of cash balance and meets the

firms obligations as and when they due.

4. INVESTING IDLE CASH

Since the main input of the company is of seasonal nature. Therefore the company has to

maintain high level of assets during cotton season, which falls between October to March.

During April to September the company gets its cash credit limits reduced in the respective

banks. The company has very good system of managing its current assets. The current

assets of the unit are managed at corporate level and the unit seeks funds according to their

requirements calculated on day-to-day basis. Hence there are no idle funds at unit level.

As the funds are monitored / controlled at corporate level, therefore, it becomes the primeresponsibility of H.O. to have a good policy of investing idle funds in an appropriate

security keeping in view the requirement of funds in the future and liquidity of the security

in which the investment is being made.


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Chapter- 7



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Accounts receivables are simply extension of credit to the firms customers, allowing them

a reasonable period of time in which to pay for the goods. Most firms treat accounts

receivables as a marketing tool to promote sales and profits. They represent extension of

credit and investment of funds and must be carefully managed. Every firm must develop a

credit policy that includes setting credit standard, defining credit terms and employing

methods for timely collection of receivables. The receivables (including the debtors and the

bills) constitute a significant portion of working capital and are an important element of it.The receivables emerge whenever goods are sold on credit and customers receivables are

created when a firm sells goods or services to its customers and accepts, instead of the

immediate cash payment the promise to pay within specified period. Thus, receivables are a

type of loan extended by the seller to the buyer to facilitate the purchase process. As

against the ordinary type of loan the trade credit in the form of receivables is not a profit

making service but an inducement or facility to the buyer-customer of the firm.

Receivables are a direct result of credit sale. Credit sale is resorted by a firm to push up the

sale, which ultimately results in pushing up the profits earned by the firm. At some time

selling goods on credit result in blocking of funds in accounts receivables. Additional funds

are required for operating needs of business, which involves extra costs in terms of interest.

Moreover, increase in receivables also increase chances of bad debts.

26089111 Working Capital Management

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